Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Tuesday, July 22, 2008

1040 FYI: DEDUCTING THE BUSINESS USE OF YOUR CAR

The IRS standard mileage allowance for business use of your car is 50.5 cents per mile for January 1 - June 30, 2008, and 58.5 cents per mile for July 1 – December 31, 2008. The IRS recently increased the SMA for the 2nd half of 2008 due to the large increases in the price of gas.

.This rate applies no matter where in the United States you drive, and no matter what type, model or make of car you drive. It is available for both a car that you own and a car that you lease.

.You can deduct the standard mileage allowance in lieu of the actual expenses if operating your car, which include-

.Or you can elect to deduct the business portion of your actual expenses.

.In addition to the standard mileage allowance you can deduct any business-related parking fees and tolls. A self-employed individual can also deduct the business portion of any auto loan interest and state and local personal property taxes on Schedule C. Employees cannot deduct the business portion of auto loan interest, but they can deduct qualifying state and local personal property taxes as a tax on Schedule A.

.Employees report auto expenses on Form 2106 or 2106EZ "Employee Business Expenses". The total of all employee business expenses is deducted in the "Miscellaneous" section on Schedule A. Miscellaneous expenses are only deductible to the extent that they exceed 2% of the taxpayer's Adjusted Gross Income (AGI). Sole proprietors report auto expenses on Schedule C.

.You cannot use the standard mileage allowance if the car is used for hire, such as a taxi, if you have 5 or more vehicles in use for business at the same time, such as a fleet operation, or if you have claimed a Section 179 expense deduction and/or any method of depreciation other than straight line in the past.

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Generally to claim the standard mileage allowance you must elect to do so in the first year the car is placed in service (the year you purchased the car, or the first year you used the car for business if later). If you claim the standard mileage rate in the first year you can switch to actual expenses in a later year - but if you claim actual expenses in the first year you may not be able to change over to the standard mileage allowance in later years. If you choose to claim the standard mileage allowance on a leased car you must use it for the entire period of the lease.

.You cannot deduct commuting - the miles from your home to your place of business or your first business stop of the day and from your place of business or your last business stop of the day back to your home. You can deduct travel between different job locations, and travel from your home to a temporary (usually lasting less than one year) job location outside the metropolitan area where you live and normally work.

.Whether you claim the standard mileage allowance or actual expenses you must keep good records. You must document the total mileage on your car for the year with a breakdown of business, commuting and other personal miles, and the date and business purpose for each business trip. A pocket date book is good enough. Enter the car's mileage on the first and last day of the year, and enter the business miles and name of client visited or business purpose for each trip. You should also record parking fees and tolls in the date book.

.Of course you must reduce the deduction for business use of your car by any reimbursement you receive from your employer under an "accountable" plan. If your employer reimburses you at a rate lower than the IRS allowance, say 30 cents per mile, you can deduct the difference. However, if your employer reimburses you at a rate higher than the IRS allowance, say 60 cents per mile, you may have additional taxable income.

.If your employer gives you a flat monthly car allowance, say $100.00 per month, which is included in the taxable wages reported on your Form W-2, you do not have to reduce your deduction by this amount.

.TTFN

.BTW – My post “A Sample of Sampling” today at THE FLACH REPORT discusses a method for documenting business mileage.

2 comments:

Anonymous
said...

I'm a personal tax pro who's having an ongoing discussion with our corporate cpa. She argues that there is a difference in a office which happens to be in the home being "qualified" for the purposes of taking mileage (principal and only place of business, but not exclusive use), and being "qualified" for the purposes of taking Office in the Home deductions (principal place of business and exclusively used). I'm interpreting IRS Pub 587 (2007), page 3 " Your home office will qualify as your principal place of business if you meet the following requirements. You use it exclusively and regularly...." in showing that exclusive use is a necessary characteristic of "principal place of business". Who's right?

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